By Dave Costello, TCV Growth Partner -
I recommend to all my clients that they prepare an annual budget. But the fact that it’s my recommendation doesn’t provide very much helpful information so let me expand.
A budget provides a road map for where you want the business to go. You don’t go to the airport with no idea of where you want to travel, do you? A budget for your business is just as important as having a destination in mind when you head for the airport. In fact, a budget identifies your destination.
A budget encompasses most of the line items from your income statement and possibly some from balance sheet activity as well. For example, if your business did $300,000 in revenues last year is that an acceptable number for next year’s budget? Will that $300,000 of revenue provide you, the owner, with sufficient income from the business for the work you are doing? If you want your business to grow, then staying at $300,000 in revenue is not sufficient. And if you have any expenses such as staff salaries that are looking at increases due to inflation or competitive factors, then your expenses will go up whether your revenues increase or not.
Preparing a budget in effect forces you to plan for the future. Ideally you have a strategic plan for the business for the next three to five years as well. But if you don’t have a strategic plan then having an annual budget is an excellent planning tool. Typically, they work in tandem. Going through the process will cause you to think about what you want to achieve and what you must do to achieve it.
What is a reasonable amount to budget for an increase in revenues next year? That answer depends on several factors:
a. What are the opportunities to increase your revenues in the current economic environment?
b. Is your product or service readily accepted and purchased in the market you are in?
c. Do you have sufficient staff to increase revenues dramatically or would you need to hire additional staff?
d. What kind of increase would you like to achieve?
Thinking about these questions will help you get to the answer you are looking for when you ask yourself how much of a revenue increase do I want to achieve next year? You want to make sure you come up with something that is reasonable and achievable, but you should make sure you are stretching yourself and your staff at the same time. The old acronym of a SMART goal is a good guide in this regard. If you don’t remember what that stands for it is:
S - specific
M – measurable
A – achievable
R – relevant
T – time specific
After considering what kind of revenue increase you would like to achieve then you can begin to work on the expense side of the budget. Salaries and benefits is typically a large expense for most businesses so you might want to start there. Questions to ask yourself are:
a. Do I need to expand the number of employees to achieve my revenue goals?
b. Am I facing any competitive or inflation risks that will cause me to increase salaries significantly?
c. Is my competitor across town trying to steal any of my superstars?
d. Are my benefit plans keeping pace with the competition and are they important for attracting and retaining staff?
All the other expenses will follow this thought process in a general way as well. Things like rent, postage, outside services, utilities, shipping and transportation, etc. should be considered and included in the budget. Many times these kinds of expenses will have increases built into them based on the lease you have or the contract you have with other vendors. Its not often that expenses like these will decrease unless there’s a change in the level of activity in your business that causes you to use less.
Make sure you consider the need for legal, consulting, coaching or other outside expertise if there is something you are planning or thinking about that is new or a stress point in your business and include estimates for those expenses in your budget as well. For example, TCV Growth Partners provides supplementary executive resources and you may be experiencing stress in an area such as finance, operations, marketing or sales and would like help. Its not expensive generally depending on the specific time needs but put something in the budget at least to hold a spot. The same holds true for legal work, additional space needs, new equipment purchases or anything that isn’t already part of your spending stream. Anticipate it and include it in the budget. Putting it in the budget doesn’t mean for sure you will spend it but having it there makes it easier in that its planned if you do decide you need to spend it.
The next purpose for having a budget is to monitor how you are doing as you go through the year. Sure, you will instinctively feel if you are doing well or not, doing better or not, but how are you measuring that feeling? Having a budget will help you look at your results and know for sure how you are doing with specific measures to provide feedback. To do this effectively you need to do a periodic comparison of actual results to the budget. I recommend performing this on a monthly basis but some companies are effective doing the comparison on a quarterly basis. My rationale for performing it monthly is that if you see a negative trend you will know about it and can take action to reverse it sooner by reviewing monthly than by reviewing quarterly. What was it that Ben Franklin said? “A stitch in time saves nine”! If you know who really said this, send me a note.
The last reason for having a budget is to establish accountability within your company. As the owner and CEO yes you are overall responsible for achieving the budget. But one person can’t do it all and you need to assign responsibility for various parts of the budget and the operations of the company to your executives. For example, if you plan to grow revenues by 25% next year and you have determined that is a reasonable growth projection, your Sales Manager should be assigned responsibility to work toward and achieve that goal. Can the Sales Manager do it on their own? No, the Operations Manager has to be able to supply the product/service to assist the Sales Manager in achieving a 25% increase in revenues. The Finance Manager/CFO needs to assist by monitoring progress toward the goal, identifying hurdles, and financing the expanded growth. It takes a team working together to achieve all the company’s goals, but in my mind it starts with assigning responsibility and accountability within the budget. This is another reason to have MONTHLY reviews of actual to budget performance; it keeps the team on track.
You know, September is the time of year that many companies start their budget process for the next year. Have you started yours? Need help? Have questions? Feel free to reach out to me by email to email@example.com and let’s start a conversation. We are happy to help; that’s our goal at TCV Growth Partners!